Taipei Economic Brief for February 2007

UNCLAS SECTION 01 OF 03 TAIPEI 000461

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BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for February 2007



1. This cable summarizes selected February 2007 economic events in
Taiwan:

--Moon Distorts Taiwan's Economic Statistics
--Economic Performance Better Than Expected
--Labor Participation Rate Up, Unemployment Down
--2007 Private Investment Goal: NT$1.67 Trillion
--Taiwan to Direct Foreign Investment to Service Sector
--Banks Improving, Some Farmers Credit Units in Trouble
--Two State-owned Banks Decided to Merge
--Flat Panel Output to Break NT$2 Trillion by 2010
--Dai Nippon Printing to Build Photomask Plant

Moon Distorts Taiwan's Economic Statistics
--------------


2. The weeklong Lunar New Year holiday began in January 2006 but
started in February 2007 resulting in a high trade growth statistics
for January 2007, i.e., an 18% rise in exports and 24% increase in
imports, both on a y-o-y basis. The holiday factor also caused high
growth in January 2007 industrial production. This factor is
expected to contribute to lower growth or even a decline in February
2007 trade and production statistics. A large transfer of equity
holdings in a local semiconductor firm offshore in January 2006 led
to a nearly 90% drop in inbound foreign investment (FDI) approved in
January 2007. Taiwan's Investment Commission noted that if the
equity transfer was excluded, approved FDI in January 2007 would
have posted growth of 141.5% from a year earlier.

Economic Performance Better Than Expected
--------------


3. In its mid-February economic forecasts, the Directorate General
of Budget, Accounting and Statistics (DGBAS) upwardly adjusted
Taiwan's 2007 economic growth to 4.3% from 4.0% projected in
November 2006. The DGBAS attributed the upward adjustment mainly to
three factors: 1) New products (e.g., Windows Vista, Office 2007,
iPhone, and a new iPod series) have prompted sharp increases in
local sales and shipments from Taiwan suppliers of parts and
components for the new products. 2) Semiconductor firms have
launched several 12-inch wafer fab construction projects. 3) Taiwan
airlines companies are expanding their fleets. These developments
have contributed to an increase in estimated economic growth from
4.02% in Q4 of 2006 to 4.03% in Q1 of 2007 and up to 4.5% in Q4 of

2007.

Labor Participation Rate Up, Unemployment Down
-------------- -


4. Taiwan has substantially improved its employment market over the
past five years. The labor force participation rate increased
steadily from 57.3% in 2002 to a seven-year high of 57.9% in 2006.
Meanwhile, the unemployment rate dropped steadily from 5.17% to a
six-year low of 3.9%, and the average number of weeks for
unemployment declined from 30 to 24. Involuntary unemployment
(defined as unemployment due to business closure, downsizing, or
conclusion of temporary or seasonal work) fell from 57% of total
unemployment to 39%. The service sector has become a major source
of job opportunities, contributing 73.4% of Taiwan's GDP with 58.5%
of Taiwan's jobs.

2007 Private Investment Goal: NT$1.67 Trillion
-------------- -


5. Taiwan wants private investment in 2007 to grow 11.4% to NT$1.65
trillion (US$50 billion). Private investment in 2006 totaled
NT$927.6 billion, 2.7% above the 2006 target. In 2007, the Ministry

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of Economic Affairs (MOEA) will try to encourage investment in radio
frequency identification (RFID),intelligent robots, electronic
pets, and nanotechnology. Meanwhile, the MOEA will promote an
e-business program for small and medium enterprises.

Taiwan Wants Foreign Direct Investment in Service Sector
-------------- --------------


6. The MOEA Department of Investment Services (DOIS) set a 2007
target of US$7.6 billion for foreign direct investment (FDI) in
Taiwan. DOIS will try to channel FDI into services, particularly
financial services, information and telecommunications (IT),and
media industries. The MOEA together with the Financial Supervisory
Commission and other agencies, will organize a road show to attract
foreign investors, principally the top 20 financial service firms in
Europe, the U.S., and Japan.

Banks Improving, Farmers Credit Units in Trouble
-------------- ---


7. Taiwan's banking sector is composed of the 42 banks, 28 credit
coops, and 278 farmers and fishermen's associations (FA) credit
departments. Banks, naturally, are the backbone of Taiwan's banking
sector, with 92% of assets and 94% of loans. Although delinquent
credit/cash card debt in 2006 eroded profitability of Taiwan banks,
they remained relatively healthy. Total delinquent credit/cash card
debt written off shot up from NT$32 billion (US$970 million) in 2004
to and NT$163 billion (US$4.9 billion) in 2006. Taiwan banks
reported pre-tax losses of NT$7.4 billion (US$224 million) in 2006
but NPL ratio in December 2006 declined to a ten-year low of 2.1%
while bad debt reserves set a new high of nearly 60% and the average
capital adequacy (CA) ratio remained above 10%.


8. The 28 credit coops and 278 FA credit departments were more
profitable than banks in 2006. Credit coops reported a 2006 an NPL
ratio of 1.8%, bad debt reserves of 38%, a capital adequacy (CA)
ratio exceeding 12%, a return on asset (ROA) ratio of 0.28%, and a
return on net worth (ROE) ratio of 4.5%. However, FA credit
departments had some disturbingly high NPL ratios and low CA ratios.
Their average NPL ratio in 2006 was 8%. Among the 278 FA credit
departments, 101 reported their NPL ratios exceeding 10%, and 95 of
the 101 reported bad debt reserves below 30% of their NPLs.

Two State-owned Banks Decided to Merge
--------------


9. Taiwan recently announced that Central Trust of China (CTC) will
merge into Bank of Taiwan (BOT) in July 2007. In early January
2007, the Securities and Futures Bureau authorized BOT to issue new
shares to replace CTC shares at a ratio of one BOT share for two CTC
shares. Currently, BOT is the largest bank in Taiwan with 9% market
share in assets, 9% in deposits, and 8.5% in outstanding loans. CTC
ranks 36th in net worth and 26th in assets among Taiwan's 42 banks.
However, CTC is a giant in insurance. CTC is the primary insurance
provider for all Taiwan military personnel, public school faculties,
and civil service employees. It also conducts procurement for
public agencies. After the merger, the new banking unit will remain
the largest bank in Taiwan, with market share of over 10%, total
assets of NT$2.93 trillion (US$88.8 billion),deposits of NT$2.29
trillion (US$69.4 billion),and outstanding loans of NT$1.67
trillion (US$50.6 billion).

Flat Panel Output to Break NT$2 Trillion by 2010
-------------- ---


10. Production of Taiwan's flat panel industry in the first ten
months of 2006 exceeded NT$1 trillion (US$30 billion). The

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Industrial Economics and Knowledge Center (IEK) estimated that in
2006 the industry will grow to NT$1.28 trillion (US$39 billion).
Flat panels which constitute 72% of the industry's production will
rise 31% to NT$925 billion (US$28 billion). The IEK further
projected that the industry will grow by an average annual rate of
15.8% to reach NT$2.24 trillion (US$68 billion) in 2010. According
to the IEK, Taiwan is about to enter a new stage focusing on
innovation in design and development in new manufacture technologies
and new materials.

Dai Nippon Printing to Build Photomask Plant
--------------


11. According to the Council for Economic Planning and Development
(CEPD),Dai Nippon Printing, the world's second largest
semiconductor photomask producer, will build a photomask plant in
Taiwan starting in April 2007. Commercial operation is scheduled to
start in September 2008. The NT$5.4 billion (US$164 million) plant
will serve as a major supplier to semiconductor companies in Taiwan,
which accounts for one-quarter of the 12-inch wafer fabs in the
world. Dai Nippon Printing anticipates a substantial increase in
demand for photomasks as major chip manufacturers are expanding in
Taiwan.

YOUNG